The secrets of success for family-owned businesses

Resilience and an eye on future generations are critical factors

By Doug Bailey| February 23, 2016

advertisement

Last in a three-part series examining the challenges of family business succession planning.
It might take a degree in genealogy to successfully sift through the family succession history of the Avedis Zildjian Company Inc., in Norwell.

Zildjian Foundry in Samatya

Now on its 14th generation of family ownership and management—it was founded in 1623 outside of Constantinople in the Ottoman Empire—it has survived multiple wars, forced relocations, economic depressions, legal challenges, family disputes, and even serious competition from a disgruntled family member.

Today, Zildjian is the world’s largest maker of cymbals and drumsticks for musicians and the oldest family-owned business in the U.S. Some of the most famous names in the music business are Zildjian customers—including Charlie Watts from the Rolling Stones, Dave Grohl from Foo Fighters, Eric Singer from Kiss, and drumming icon Buddy Rich.

The company’s survival makes it something of an outlier, according to statistics. The sad truth is that 70 percent of family-owned businesses last just a single generation, according to a survey by the Harvard Business Review. “The low survival rate has alarming consequences,” the HBR article concluded. So why do so many family-owned businesses fail, or fail to successfully turn over the business to a successor?

“Entrepreneurs create these businesses because they want to do more than earn money—they want to build a legacy their children and grandchildren can be proud to continue,” said David Scarola, vice president of The Alternative Board, an organization that provides advisory boards and business coaching for business owners. “But many times, the children simply don’t want the business. They don’t share the passion that the founders did. They want the money but not the business.”

advertisement

Avedis Zildjian II in 1851

With the majority of family-owned businesses failing to make it to successive generations, wouldn’t it be wiser in most instances to forgo the tradition of keeping the business in the family and instead sell it to a third-party? The data isn’t clear, and in some cases downright contradictory. But one recent study by the Boston Consulting Group indicates family businesses enjoy enormous economic advantages and could even teach a thing or two to non-family-owned businesses on how to better run their operations.

“Our results show that during good economic times, family-run companies don’t earn as much money as companies with a more dispersed ownership structure,” the report’s authors wrote. “But when the economy slumps, family firms far outshine their peers.”

That’s because family companies focus on resilience more than performance, the study found. They forgo the excess returns available during good times in order to increase their odds of survival and successful family succession during bad times.

“A CEO of a family-controlled firm may have financial incentives similar to those of chief executives of non-family firms,” the survey said. “But the familial obligation he or she feels will lead to very different strategic choices. Executives of family businesses often invest with a 10- or 20-year horizon, concentrating on what they can do now to benefit the next generation.”

In other words, having an eye toward one’s family successor may positively influence a company’s business decisions.

advertisement

The Zildjian story

Avedis III in 1929

That might help explain why Zildjian thrived when the company relocated to the U.S. from Turkey: Avedis Zildjian III, who was operating a candy factory in Quincy, was the only surviving male in the direct line of family succession. The year was 1929, and the Great Depression was just beginning. Somehow the company rose above the hundreds of other firms that were struggling or disappearing during that dreadful period (the fact that the Jazz Era was also just starting didn’t hurt).

Like most family-owned businesses, Zildjian—which literally means son of cymbal maker in Armenian—never had a formal succession plan. Surveys show that is very common. The tradition was that the eldest son of the current owners would receive the family’s secret formula for making top-notch cymbals and take the reins of the company when the time came. It didn’t always work out like that.

Armand in Quincy, Mass. in 1945

During World War II, Avedis drafted the first-ever written version of the secret cymbal casting formula and kept a copy in the company vault and another in his home in case his sons did not return from the war. In 1945, though, eldest son Armand returned and took responsibility for the business along with his brother Robert, who was also given the secret formula.

But in 1977, when Armand was named president of the company, conflict erupted between the two brothers and Robert split to form his own cymbal company, called SABIAN—an amalgam of the first letters of his children’s names, Sally, Billy, and Andy. A legal feud ensued, and Robert was barred from using the Zildjian name and utilizing the family formula that he had been privy to.

Armand Zildjian in 1977

Analysts suspected the two companies would cannibalize each other and both would suffer from a split market. Instead, Zildjian and SABIAN, while fierce competitors, are among the top two cymbal makers in the world, cherished by drummers in all genres of music, from jazz to pop to rock.

Secrets of Family-Owned Business Management

The Boston Consulting Group survey looked at large family-run corporations—and there are plenty of them: Walmart, Samsung, Tata Group, Porsche, Cargill, Michelin, Koch Industries, LG, and News Corp. among them—but it revealed a management pattern that could be used by companies of any size and even those not owned and operated by family members.

The survey, which was published last year in the Harvard Business Review, identified seven differences in their approach to business compared to traditional non-family-owned businesses.“…family firms seem imbued with the sense that the company’s money is the family’s money, and as a result they simply do a better job of keeping their expenses under control.”“We don’t spend more than we earn,” one CEO at a family firm told the survey’s authors. “This sounds like simple good sense, but the reality is, you never hear those words uttered by corporate executives who are not owners.”“Debt means having less room to maneuver if a setback occurs—and it means being beholden to a non-family investor.” In the family-owned companies surveyed, debt accounted for 37 percent of their capital, on average, compared with 47 percent for non-family firms.Family companies are not energetic dealmakers. On average, they made acquisitions worth just two percent of revenues between 2001 and 2009, the survey said, compared to nearly twice as much for non-family-owned firms.“A large number of family businesses…were far more diversified than the average corporation,” the survey found.Family-owned businesses have been more ambitious about overseas expansion, according to the survey. On average, 49 percent of their revenues come from outside their home region, versus 45 percent at non-family firms.Only nine percent of the workforce in the companies studied turned over annually, compared with double-digit turnover rates at non-family-owned firms.

“The resilience-focused strategy of family-owned companies may become more attractive to all companies,” the survey concluded. “In a global economy that seems to shift from crisis to crisis with alarming frequency, accepting a lower return in good times to ensure survival in bad times may be a trade-off that managers are thrilled to make.”